Author Topic: please evaluate my 5 year path to FIRE  (Read 1098 times)

ericbonabike

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please evaluate my 5 year path to FIRE
« on: January 14, 2020, 08:01:28 AM »
I'm 43.  I'm married and have three kids.  15,13, and almost 2.
Our TNW is 1.5 million.  LNW is 1.4 million.   Only debt is 2 house mortgages, the first of which is currently making a modest amount of money as a rental. 

I anticipate FIRE'ing in 5 years after my youngest older kids graduates high school.
Maybe in that timespan, our networth will increase to ~2 million. 

Of my the 1.4 LNW,
1.1 million is in tax-advantaged accounts (401ks, IRAs)
300k is in non-tax advantaged accounts.

Of the 1.1 million in tax advantaged accounts.
800k is in traditional.
300 k in roth.


My current LNW asset allocation is: 
75% total stock market or S&P 500 large cap
10% in us bond fund
15% in my company's ESOP.

We currently spend 70k a year, but a lot of that will decrease in 3-5 years as kids become older.   We currently max out both of our 401ks & IRAs, max out our HSA, and we contribute a bit to the kids 529 plans.  Any other savings is put into brokerage account.  Our total savings is about 60k a year into our tax advantaged accounts.  And another 30k a year into brokerage accounts.  We do this on a gross income of about ~200k annually. 

I guess my questions are does this plan look reasonable??
Are there steps should I be taking over the next 5 years to transition to FIRE?
For example:  Should I contribute less money to my 401ks & IRAs and increase the amount of money I'm saving in my brokerage account?
Should I start transitioning to a higher bond allocation?  maybe an 80/20?   
My ESOP is scaring me.  It's all been free profit sharing contributions, and I have never really considered it.  But I've got 15% (~220k) in it, my corporation is projecting the stock price will double within 5 years.   That'll push the balance in that up to close to 500k, and if my total assets are 2 million, that's 25%.  Which is a HUGE percentage. 
Unfortunately, the terms of the ESOP, are that I can't touch the money until I quit, or turn 55 (can start drawing it down), or retire at age 62.  If I quit, they will convert the stock into cash, sit on it up to  5 years, and then pay me out over a period up to 4 years.  So, if I retire when I'm 48, I won't see 100% of that money until older than 55 anyway.


« Last Edit: January 14, 2020, 08:05:00 AM by ericbonabike »

JGS1980

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Re: please evaluate my 5 year path to FIRE
« Reply #1 on: January 14, 2020, 09:37:04 AM »
Hi,

We have similar timeline albeit with different numbers, and my family spending is a little higher. Go Class of 2025!!!

A couple questions for ya:
1. Is college an expense your family will be covering?
2. What if your older kids don't "launch", will FIRE be compromised by this?
3. ESOP with it's restrictions makes it tough to handle. It's almost like a delayed pension with no guarantee of actual value at the end. I would VERY CONSERVATIVELY value this.
4. Health Insurance?

*By my math, if you truly spend 70K/year, then 2 Million liquid should cover your costs with a little leeway just in case. HOWEVER, I would subtract a high ESOP percentage from your total LNW and you may need to add Health Insurance costs to your anticipated yearly spend.


BradminOxt19

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Re: please evaluate my 5 year path to FIRE
« Reply #2 on: January 14, 2020, 11:01:53 AM »
I would say you should plan to work a little bit longer just in case, to build more of a cushion than what you have now.

A couple big what-if's:

1. Divorce could happen.  Once you have all that free time you may find that you don't like the same things as your partner or even want to be married with them once the kids leave the nest.  Being parents is lot of work and you don't get to focus on just the two of you with nothing else in common to do.  Even MMM divorced but haven't said much on the topic, to my big disappointment.  I think we could learn a lot from his experience.

2. Insurance is an issue all of us are dealing with.  Medical technology is getting better but also more expensive. 

Personally I'm in a place where I can FIRE if I wanted, but I'm holding back in reserve because I'm making a good income with pretty interesting and easy work, so I'm going to milk it as long as I can.  I'm not going to jeopardize financial comfort by doing FIRE now when the income is good and I can handle it easily.  I think once I go FIRE it will be very hard to jump back on the work wagon if we should need more money.  Every day / week / month I tell myself as long as I can deal with work for the commensurate income, I'll keep piling on the stashe.  Better to have too much stashe than too little.

ericbonabike

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Re: please evaluate my 5 year path to FIRE
« Reply #3 on: January 15, 2020, 11:19:56 AM »
I would say you should plan to work a little bit longer just in case, to build more of a cushion than what you have now.

A couple big what-if's:

1. Divorce could happen.  Once you have all that free time you may find that you don't like the same things as your partner or even want to be married with them once the kids leave the nest.  Being parents is lot of work and you don't get to focus on just the two of you with nothing else in common to do.  Even MMM divorced but haven't said much on the topic, to my big disappointment.  I think we could learn a lot from his experience.

2. Insurance is an issue all of us are dealing with.  Medical technology is getting better but also more expensive. 

Personally I'm in a place where I can FIRE if I wanted, but I'm holding back in reserve because I'm making a good income with pretty interesting and easy work, so I'm going to milk it as long as I can.  I'm not going to jeopardize financial comfort by doing FIRE now when the income is good and I can handle it easily.  I think once I go FIRE it will be very hard to jump back on the work wagon if we should need more money.  Every day / week / month I tell myself as long as I can deal with work for the commensurate income, I'll keep piling on the stashe.  Better to have too much stashe than too little.

I hear you.  The future is unknowable.  I'm married to the woman of my dreams and have a hard time imagining life without her.  But, I've been through the big D once.  And I understand how significant this can be. 

I guess one of my questions is:
I have 5 years.   How do you structure the last 5 years of investments to prepare you for the first 5 years of retirement?

I'm imagining putting every penny of after-tax money in the next 5 years (roughly putting away 1 year of expenses every year into brokerage account) and buying nothing but bond funds.  These will more or less be immune to market crash and get me through the first 5 years of retirement. 
When I retire, spend the dividends and sell off bond fund as needed to cover the remainder.  While doing roth conversions up to whatever threshold we decide.
After the bonds are completely sold off in the brokerage account, I start selling stocks in brokerage account.  Also doing roth conversions.  These will have between 5 and 10 years to appreciate before I get done spending those.


Then when my after-tax accounts are drained, I begin spending down roth principle amounts.
Is that how most people do it? 

JGS1980

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Re: please evaluate my 5 year path to FIRE
« Reply #4 on: January 15, 2020, 02:59:09 PM »
I would say you should plan to work a little bit longer just in case, to build more of a cushion than what you have now.

A couple big what-if's:

1. Divorce could happen.  Once you have all that free time you may find that you don't like the same things as your partner or even want to be married with them once the kids leave the nest.  Being parents is lot of work and you don't get to focus on just the two of you with nothing else in common to do.  Even MMM divorced but haven't said much on the topic, to my big disappointment.  I think we could learn a lot from his experience.

2. Insurance is an issue all of us are dealing with.  Medical technology is getting better but also more expensive. 

Personally I'm in a place where I can FIRE if I wanted, but I'm holding back in reserve because I'm making a good income with pretty interesting and easy work, so I'm going to milk it as long as I can.  I'm not going to jeopardize financial comfort by doing FIRE now when the income is good and I can handle it easily.  I think once I go FIRE it will be very hard to jump back on the work wagon if we should need more money.  Every day / week / month I tell myself as long as I can deal with work for the commensurate income, I'll keep piling on the stashe.  Better to have too much stashe than too little.

I hear you.  The future is unknowable.  I'm married to the woman of my dreams and have a hard time imagining life without her.  But, I've been through the big D once.  And I understand how significant this can be. 

I guess one of my questions is:
I have 5 years.   How do you structure the last 5 years of investments to prepare you for the first 5 years of retirement?

I'm imagining putting every penny of after-tax money in the next 5 years (roughly putting away 1 year of expenses every year into brokerage account) and buying nothing but bond funds.  These will more or less be immune to market crash and get me through the first 5 years of retirement. 
When I retire, spend the dividends and sell off bond fund as needed to cover the remainder.  While doing roth conversions up to whatever threshold we decide.
After the bonds are completely sold off in the brokerage account, I start selling stocks in brokerage account.  Also doing roth conversions.  These will have between 5 and 10 years to appreciate before I get done spending those.


Then when my after-tax accounts are drained, I begin spending down roth principle amounts.
Is that how most people do it?

"I have 5 years.   How do you structure the last 5 years of investments to prepare you for the first 5 years of retirement?"

Hi again. JGS here.

Again, I'm about 5 years away as well.
*How I plan on doing it:
-I'm 90/10 Equities/Bonds, of the Equities, about 25% of them are International.
-I will continue the above Asset Allocation until I'm about 2 years from retiring, and then I will adjust down to 60/40 or so.
-I know myself, so I know that if the world economy hits the fan in the next 5 years and doesn't recover within 2 years, I ain't retiring anyway and will keep my immensely stable monetarily rewarding job, so I may as well take the higher risk/reward path of a high equity allocation.
-once I retire, I will spend down my Taxable account with associated Dividends until they run out in 5-10 years. Later over the following 10-15 years, we will dig into the Roth and then 401K fund last (all the while converting to more to Roth from 401K as possible while considering the ACA cliff for healthcare). Eventually will come Social Security which we won't need but we will use as a buffer and as a hedge against longevity.

Have you looked at I-ORP yet? Very clarifying for me when I went through it last year.

https://www.i-orp.com/TaxRepeal/index.html

All the best,  JGS

robartsd

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Re: please evaluate my 5 year path to FIRE
« Reply #5 on: January 15, 2020, 03:33:33 PM »
You have significant taxable and Roth assets (I assume significant Roth contributions rather than amazing growth of small contributions), so I see no need to hold bonds in a tax inefficient way. As long as you'd have enough taxable + Roth contributions left after a downturn to build your conversion ladder it should not matter. I'd allocate all bond holdings to tax deferred accounts. If you want to spend money out of taxable while maintaining your overall stock holding, simply buy the stocks in tax deferred accounts by selling bonds at the same time you sell the stocks in your taxable account. If the result is some tax losses, use them to convert tax deferred to Roth.

The decision on when to increase your bond allocation is simply a function of how important locking in your retirement date is. I personally like JGS's plan to increase bonds fairly close to retirement; but that isn't the right answer for everyone (I might even change my mind as I get closer).

ixtap

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Re: please evaluate my 5 year path to FIRE
« Reply #6 on: January 15, 2020, 03:37:39 PM »
In five years, you will have a much better idea of what those older kids will be doing, as well as the world around you. For context, we had discussed building a 5 yr CD ladder. However, with the current CD rates what they are, HYS is usually as good and doesn't involve keeping track of rotating CD deals. We did change from an untracked allocation that was about 92/8 when we finally checked to a conscious 70/30 about three years out.

In the meantime, max out your tax sheltered options (do either of you have access to mega backdoor Roth?). Find an asset allocation you are comfortable with. Distribute that AA in a tax efficient way. Unless you are all in on Munis or something similarly tax efficient, this probably means you do not want bonds in taxable during accumulation. Of course, with kids, your tax picture looks very different than ours.

When it comes time, you pull money out according to tax consequences and AGI goals, in a way that maintains your AA. There may be years when this means living off a combination of taxable and Roth while making conversions. I mean, if you have stocks in your traditional accounts, wouldn't you want to convert during a bear market?
« Last Edit: January 15, 2020, 03:49:34 PM by ixtap »

Freedomin5

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Re: please evaluate my 5 year path to FIRE
« Reply #7 on: January 15, 2020, 03:39:31 PM »
The Pre-FIRE checklist on this forum may be helpful:

https://forum.mrmoneymustache.com/post-fire/pre-fire-checklist/

DoNorth

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Re: please evaluate my 5 year path to FIRE
« Reply #8 on: January 16, 2020, 05:38:50 AM »
my situation is a bit different, but if you annuitized/drewdown your LNW using 4% rule, it would look  similar.

I'm 41 and working one more year on a limited contract overseas.  Only debt is one small mortgage about $1200/month, no prop tax, and I have full healthcare coverage since I'm retired miltary.

my pension is $5300/month or $63600/year ($21K which is federally taxable) adjustable with the CPI-W.  Other assets are about $500K in traditional IRA/401K, $200K in home equity, $20K in savings and about $150K in other non-cashflowing property I own outright.  I'm trying to get right to about $75,000-$78,000 in net income/year so I'm currently lowering my equity allocation a few percentage points each month with a 2 fold purpose of locking in some of the gains and setting aside some of the funds so they can be either withdrawn via 72t or converted using a roth IRA ladder.  Current allocation is about 65% equity/35% bond/cash.   I'm going to supplement the pension the first five or so years with savings from my last year of work, about $1200-$1500/month = about $60K to $75K in liquid savings.  If this strategy seems to work, I'll begin converting tIRA to roth IRA next year.

Taxes for the conversion would work like this:  $21,000 taxable income-$24,000 standard deduction= -$3000+ whatever amount incurs $1200 in tax or about $15,000.  This should generate a refund of about $2800 in refundable tax credit (2 kids)



Laura33

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Re: please evaluate my 5 year path to FIRE
« Reply #9 on: January 16, 2020, 06:37:45 AM »
One caveat:  if you are looking for price stability, look at individual bonds or CDs, not bond funds.  Bond values can fluctuate wildly in a crash, and in the 2008 timeframe, many asset classes all went down together.  If you are in a bond fund, and the fund decides to sell bonds when the value is down -- because, say, a bunch of people who have invested in the fund decide to yank their money -- you have locked in those losses.  OTOH, if you have a bond that is going to be worth $500 in ten years and you hold onto it for that ten years, you will get your $500; if you have a bond that is paying a specified interest rate, you will get that interest rate, no matter what the current trading value of the bond is. 

Note that I am not saying that bonds are or aren't a good investment.  But if the reason you want them is stability and guaranteed income to cover the years until you can access your tax-sheltered accounts, you want a ladder of individual bonds, not money in a bond fund.